- ASX SPI 200 futures up 0.2% to 6,878.00
- Dow Average down 0.5% to 32,909.59
- Aussie up 0.7% to 0.6928 per US$
- U.S. 10-year yield rose 3.2bps to 3.0480%
- Australia 3-year bond yield rose 7 bps to 3.27%
- Australia 10-year bond yield rose 6 bps to 3.58%
- Gold spot up 0.7% to $1,747.86
- Brent futures up 4.0% to $100.30/bbl
- 11:00: (AU) Australia to Sell A$800 Million 3% 2033 Bonds
Stocks retreated after weak economic data, with traders awaiting more clarity on the Federal Reserve’s monetary policy path from the annual central bankers’ symposium later this week.
The S&P 500 saw its third straight drop after swinging between gains and losses throughout the session. Trading volume was among the lowest in 2022. Treasury 10-year yields topped 3%, while the dollar halted a four-day rally.
Australia’s rapid-fire interest-rate increases are sending tremors through the nation’s heavily indebted households and threatening a property downturn on a scale unseen since the eve of the 1991 recession.
The market hardest hit is bellwether Sydney, where home values have dropped almost 5% in the past three months, compared with 2% in the A$9.9 trillion ($6.8 trillion) national market. Further falls are inevitable as the Reserve Bank, which meets again in just under two weeks, raises borrowing costs at the fastest pace in a generation.
Home prices are weakening from Stockholm to San Francisco as central banks scramble to contain the hottest inflation in decades. Rate-hike risks are intensified in Australia by a record debt-to-income ratio of 187.2%.
“Australia is quite an exposed market in the world in the sense that household credit and mortgage debt as a share of GDP ranks quite high,” said Louis Kuijs, chief Asia economist for S&P Global Ratings. “There’s a lot of debt out there. The higher the debt-to-GDP, the more the rate channel starts to matter.”
The RBA acknowledges it has only a narrow path to push rates high enough to snuff out excess inflation without driving the economy into recession. The Bank of Korea is grappling with a similar conundrum as it meets on Thursday, while the Federal Reserve has signaled flexibility on future rate moves.
Global policy makers have learned the lessons from 1970s episodes by raising rates in early, large increments to keep inflation expectations in check. The RBA has hiked by a half-percentage point at its past three meetings after a surprise quarter-point move in May to take the cash rate to 1.85%.
Under a scenario of a 3 percentage-point increase in the RBA’s cash rate, nationwide house prices would fall by almost a quarter. Real estate advertiser REA Group Ltd. says the national market hasn’t dropped by 10% in a 12-month period since 1990.
While Australian property prices are falling, they remain well above pre-pandemic levels, keeping affordability stretched and suggesting ample scope for additional declines.
Bloomberg Economics reckons the RBA is unlikely to lift rates to the peak priced in by money markets of 3.8% by April — more than double the current level — as it would trigger a recession.
It sees a terminal rate of 2.75% next year, a little over the central bank’s estimate of neutral and opening up the possibility of a soft landing for the economy. Still, it does see a squeeze ahead for households.